DEALBOOK; Federal Inquiry Grows Over Olympus Payout

By BEN PROTESS and HIROKO TABUCHI

Published: October 28, 2011

Federal authorities are intensifying an investigation into the large fees that the Japanese company Olympus paid to an obscure American brokerage firm. The Securities and Exchange Commission and other regulators have now begun their own inquiries into the $687 million payout, according to people briefed on the inquiries.

The Federal Bureau of Investigation opened the case only two weeks ago, but the inquiry has now grown to touch nearly every corner of the federal law enforcement arsenal. Federal prosecutors in Manhattan have jumped on the case, while the S.E.C. has begun an examination of the now-defunct brokerage firm, Axes America.

An S.E.C. spokesman declined to comment.

While the focus of the investigation is not yet clear, securities lawyers speculate that investigators will potentially examine whether the steep fees were kickbacks to Olympus officials involved in the deal. So far, it is believed that federal authorities are possibly interested in whether the fees amounted to money laundering or other illicit acts. A spokesman for the F.B.I. in New York declined to comment.

The F.B.I. began its examination soon after Olympus fired its chief executive, who had confronted the company's chairman about the suspect payouts. Japanese regulators are now looking into the matter as well.

The questions arose from Olympus's 2008 takeover of a British medical device company, the Gyrus Group. Olympus, which runs both a medical equipment business and a less lucrative digital camera business, has described the $687 million payout as a fee to Axes America for advising on that deal.

But when Olympus announced the acquisition, it said only that Perella Weinberg, an independent investment bank, advised on the deal. The company made no mention of Axes America, according to a recent PricewaterhouseCoopers report.

By any measure, the fees were eye-popping. The funds amounted to 36 percent of the value of the Gyrus deal, the PricewaterhouseCoopers report said. Olympus later doled out the bulk of the $687 million to a Cayman Islands company linked to Axes, a firm called Axam Investments.

At a news conference in Tokyo on Thursday, the newly installed president of Olympus, Shuichi Takayama, defended the funds paid to Axes and Axam, saying that Olympus had determined that the fee ''would fully pay off.'' He said the advisers were hired to give wide-ranging guidance to Olympus, including identifying potential takeover targets in the medical field.

''Olympus sought acquisitions as part of a strategy to find new growth areas and reduce our dependency on endoscopes,'' Mr. Takayama said. ''These acquisitions were part of that effort.''

Mario Takeno, an official at Japan's securities watchdog, the Securities and Exchange Surveillance Commission, told a parliamentary committee on Thursday that the agency would ''closely watch'' the findings of a third-party committee set up by Olympus to investigate the payments.

''It's clearly worth investigating,'' said J. Mark Ramseyer, a professor of Japanese legal studies at Harvard Law School, who added that the fees were ''bizarrely huge.'' While the PricewaterhouseCoopers report did not identify ''improper conduct,'' it said that ''given the sums of money involved and some of the unusual decisions that have been made, it cannot be ruled out at this stage.''

Axes America itself presents a curious case.

Just weeks after Olympus closed the deal for Gyrus, the firm shuttered its doors. And after the affiliated Cayman Islands company, Axam Investments, scooped up its portion of the bounty, it too shut down.

It was a peculiar end for both firms. In its 10-year history, Axes America never drew much notice on Wall Street. The firm, run by a longtime Japanese banker, Hajime Sagawa, generated mediocre revenue and never drew the ire of regulators.

Mr. Sagawa could not be reached for comment. A relative in Boca Raton, Fla., said he had planned to return from a business trip late last week, potentially to meet with the F.B.I. But the relative said on Wednesday that Mr. Sagawa had not yet returned to Florida. He has not been accused of any wrongdoing.

Michael C. Woodford, the recently fired Olympus chief, who is British, was in New York on Wednesday meeting with F.B.I. agents and federal prosecutors. He declined to provide specifics of the meeting. As Mr. Woodford flew to New York, Olympus fell deeper into turmoil. On Wednesday, the company's chairman, Tsuyoshi Kikukawa, resigned.

At Thursday's news conference, the executive vice president, Hisashi Mori, did most of the talking.

Mr. Mori said he had been introduced to the advisers by a person in Japan whom he declined to name. The advisers had worked with Olympus in an informal capacity for no fee since around 2004 before being formally hired two years later ahead of the 2008 Gyrus deal, he said.

An official said there had been no discussion of Mr. Woodford's concerns over the acquisitions before the board voted to oust him.

Tensions flared at the news conference, as reporters berated Mr. Takayama and his colleagues for long-winded responses. ''What is the point of this press conference if you are not going to address the main issues?'' one reporter asked.

This is a more complete version of the story than the one that appeared in print.